Thursday, 20 July 2000

House of Lords' Judgment
The House of Lords has ruled that The Equitable is not entitled to differentiate, when setting final bonuses, between policyholders depending on whether or not their policies contain Guaranteed Annuity Rates 'GARs' or on the form in which benefits are taken. The House of Lords' ruling, on a complex point of law, is different from the rulings delivered by the Court of Appeal, and the High Court. The Board of The Equitable (the 'Board') has met this morning to consider the implications of the ruling.

Given the current annuity rates, the House of Lords' decision will increase the value of benefits taken in GAR form. The Society has always had a policy of distributing profits to its policyholders and has essentially no orphan assets to absorb the increased benefits available on GAR policies. Therefore, these can only be paid at the expense of all other with-profits benefits. Furthermore, the judgment will increase the Society's statutory reserves and that will diminish the Society's capital strength and reduce its investment freedom.

There is no impact on other policies, including conventional annuities and unit-linked policies.

The Board had prepared for this contingency as one of a number of possible outcomes. Since the ruling, the Board has reviewed the courses of action now available to the Society.

Despite the Society's long commitment to mutuality, the Board has concluded that members' interests will be best served by the sale of the business to an organisation capable of providing capital support and therefore ensuring continued investment freedom. The proceeds of sale to such a parent will mitigate the reduction in benefits that with-profits policyholders not taking GAR benefits would otherwise suffer. The Society has instructed its financial adviser, Schroder Salomon Smith Barney, to commence a sale process. Members joining the Society from and including today will not participate in any benefits derived from the sale of the business.

The underlying strengths of the Society's business remain:

• its market leading position as a provider of flexible low cost pension and investment products;

• its expense base which is the lowest in the industry;

• its powerful brand;

• its large client base focused on high net worth individuals;

• its highly trained and highly productive sales force; and

• its world class systems infrastructure.

Pending a thorough review of the implications for bonus rates final bonuses will be suspended for approximately one week, until the Society revises rates to take account of the House of Lords' ruling. Any members retiring or taking benefits from maturing policies during this period will have final bonuses backdated to their retirement or maturity date. Policy values quoted as at 31 December 1999 are not expected to fall.

The Society is currently developing a plan to implement the House of Lords' decision in relation to former GAR policyholders, wherever appropriate. It is intended that a framework document for the plan will be released shortly. It is intended that the detailed plan will be endorsed by an independent actuary.  The Society will write to all members shortly setting out the implications for their policies. Members with questions may call 0870 600 2272.

John Sclater, President of the Society, said:

'This judgment has brought to an end a period of uncertainty in our treatment of different classes of with-profits policyholder. We are grateful to our members for their patience while this highly complex issue has been taken through the courts and greatly saddened that the eventual ruling will lead to an end of our long tradition of mutuality. The business's great strengths remain - an outstanding sales force, the lowest expense base in the industry and an unparalleled range of flexible low cost life and pension products. We are confident that, with a strong parent, the business can take forward these strengths and prosper. A sale process is being put in hand and will be advanced as quickly as possible. The Board is determined to achieve full value for members.'

Letter to policy holders :

Dear Policyholder

Guaranteed annuity rates : House of Lords' ruling
I am sure you will have seen reports of the House of Lords' ruling on our approach to policies containing Guaranteed Annuity Rates (GARs). I am writing to you to explain what the ruling means for you and why your Board has decided that members' interests will best be served by the sale of the Society.

The ruling and its meaning
In essence, the House of Lords ruled that The Equitable is not entitled to give a different level of final bonus to those policyholders who take their benefits using GARs.

The ruling means that The Equitable is required to increase benefits for some policies with a corresponding reduction in the benefits of other policies. One of the aims of the sale of the business is to restore reduced benefits to the previous levels.

Final bonus rates were suspended by the Board on 20 July 2000 while the precise implications of the House of Lords' ruling were determined. New final bonus rates were introduced on 26 July 2000 and operate with effect from 20 July 2000. The effect of the new rates is reflected in the details below.

The impact of the ruling depends on the types of policy which you hold (or held):

(i) If you have a with-profits policy which does not contain a GAR the growth allocated to you for the year 2000 will be lower than it otherwise would have been. No growth will be allocated for the period 1 January to 31 July 2000. The normal growth rate will resume from 1 August 2000. It is intended that the loss of seven months' growth will be made good from the proceeds of the sale of the business.

(ii) If you have a with-profits policy which contains GARs (mostly pensions policies sold before 1 July 1988) no growth will be allocated for the period 1 January to 31 July 2000 as described in (i) above. It is intended that the loss of seven months' growth will be made good from the proceeds of the sale of the business. As a result of the House of Lords' ruling the full fund, including final bonus, will now be available to secure an annuity using the GARs in the policy.

(iii) If you have a with-profits annuity already in payment the next annual review to set the level of payments will include an adjustment to reflect the impact of the House of Lords' ruling. As a result, the growth allocated to the policy will be 1% lower than it otherwise would have been. The precise figures will be issued to you in advance of the change in payment in the normal way. It is again intended that the loss of growth will be made good from the proceeds of the sale of the business.

(iv) If you have a non-profit policy (for example a conventional or index-linked annuity, a unit-linked policy or a temporary assurance) the ruling does not affect your policy. Investments held with Equitable Unit Trust Managers, such as unit trusts, PEPs and ISAs, are also unaffected.

(v) If you have already taken retirement benefits under a policy which contained GARs and those benefits commenced at a time when GARs exceeded current market annuity rates - that is at various times in 1994 and subsequently - we will contact you separately in due course to explain the implementation of the House of Lords' ruling in respect of your benefits.

Sale of the business
When I wrote to you in February 2000, after the Court of Appeal ruled against the Society by overturning the High Court's judgment, I explained that if the House of Lords upheld the Court of Appeal's judgment, there would be no significant costs imposed on the Society. In the event, the House of Lords' ruling has gone substantially further than the Court of Appeal's judgment and it is for that reason that its impact is far greater than that discussed in the earlier letter.

As well as the direct impact on policy benefits described above, the ruling increases the Society's statutory reserves and that will diminish its capital strength and reduce its investment freedom. In the circumstances and despite the Society's long commitment to mutuality, the Board has concluded that members' interests will now best be served by the sale of the Society. This will provide additional funding needed for the restoration of policy values in due course and it will preserve the investment freedom of the with-profits fund for the future.

Preparations for the sale process are now underway. The process is likely to mean, subject to members' approval at an Extraordinary General Meeting (EGM) in 2001, that the Society will demutualise and will be acquired by another financial institution.

We expect to have identified a suitable purchaser before the end of this year, with the sale process being completed by next summer. Our principal aim in selecting a purchaser will be to maximise the value obtained and, in particular, to restore benefits as described above.

I shall write to you again when a potential purchaser has been identified and will also then explain the process for completing the sale, including the arrangements for the EGM and for obtaining members' approval.

Conclusion
I am personally greatly saddened by the need to end the mutual status of our Society which has served members so well for so long. I am also very sorry that the process of seeking the necessary certainty on the GAR issue through the Courts has caused so much concern to members, both to those with and to those without GARs. However, working with a strong parent organisation will now not only further the interests of all members but will also encourage the development of the business in new ways. The Equitable remains an excellent business and members will continue to benefit from its many underlying strengths.

A summary of the House of Lords' ruling and its implications is available by telephoning (0870) 600 2272 or by visiting our Internet site at www.equitable.co.uk

If you would like a copy of the full ruling you will find one, together with other information, on our Internet site or you can obtain one by writing to our Client Servicing Centre at the address shown.

Yours sincerely
A Nash
Managing Director and Actuary

Useful links :

A full copy of the Appeal Court judgment can be downloaded, in pdf format, by following the link below.

• Appeal Court Judgment on Guaranteed Annuity Rates

A full copy of the original judgment can be downloaded, in pdf format, by following the link below.

• Court Judgment on Guaranteed Annuity Rates

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